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Don’t fall into these traps when accounting for stock-based compensation

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If you work at a startup company or have startup clients, you know all too well that cash can be tight and hiring and retaining top talent is a challenge. 

In response many startups turn to equity compensation to attract and retain top talent without breaking the budget on salaries and benefits. Stock-based compensation also ties employees to the company’s success as they essentially become owners. Employees will theoretically work harder and think twice before leaving if they have a chance to earn a substantial windfall in exchange for taking a below-market starting salary.

Great. But founders and their financial teams must remember that equity compensation is not free — it’s a form of deferred compensation that must be treated as an expense. As such, equity compensation has strict rules and regulations for employers and employees to follow, especially regarding taxes. 

Even with substantial financial backing, many private/early-stage companies do not have enough resources to handle complex GAAP accounting and financial reporting for SBC awards. This can be problematic since larger investors or banks typically want a third party to sign off on the accuracy of the startup’s financials. They want assurances that the company is not doing anything fraudulent or failing to follow GAAP guidance. Also, being careless with SBC in your company’s early years can make it very costly and time-consuming to change from non-GAAP to GAAP standards as you prepare for an IPO, sale or other exit.

Setting the table

One of the top requirements is to determine fair market value for the company’s stock through a 409(a) valuation, which is required for tax compliance and necessary before optioning or issuing stocks. Typically, startups will need to undergo the 409(a) valuation once per year and any time after they raise funding. Companies should also provide reasonable guidance to employees about the tax consequences of various types of equity compensation. That’s very important since some employees, particularly young workers, have never received equity compensation before. When restricted stock awards provide ownership interest upon vesting, the 83(b) election allows these awards to be taxed at the grant date based on their FMV — even if they have not fully vested. By making an irrevocable 83(b) election within 30 days of the RSA grant, employees recognize taxable income immediately without waiting for vesting. This strategy can be beneficial if the stock’s value is expected to rise, since it minimizes ordinary income and maximizes capital gains upon sale. However, employees and their advisors should be cautious because taxes paid via this election are non-refundable if the RSA does not vest, or if its value declines. Generally, paying tax upfront is advantageous when the stock’s value is lower.

Five things that founders and financial teams often overlook regarding equity compensation

1. Being too generous: Founders might want to understand various types of share-based payment awards, such as stock options, restricted stock awards, restricted stock units, etc., that best align with the company’s expected growth and strategies. They might unintentionally give out too many shares in employee equity plans without taking into account long-term equity dilution. Without careful planning, founders could inadvertently allow employees to receive more financial benefits than the company planned for in a liquidity event. Also, the founders might not have enough shares to give up in later rounds of financing.

2. Vesting criteria too easy to meet: Share-based payment awards come with various vesting conditions, with a plain vanilla plan being a four-year service vesting requirement without other performance conditions or without taking market conditions into account. Founders and their financial teams may want to provide employees with additional conditions if the vesting conditions are easy to achieve. Otherwise, key employees might leave the company much sooner than expected. I’ve found over my career that the easier the vesting conditions, the less motivation employees tend to have to perform at a high level and attrition rates rise.

3. Vesting criteria too aggressive: Conversely, if the employer wants to make vesting more stringent or restrictive, it can add conditions such as EBITDA targets or IPO/change in control, which are considered performance conditions, or multiple of invested capital, which is a market condition. Stock-based compensation awards serve as incentives. Vesting conditions should be challenging enough to drive employees toward meaningful, but not unrealistic, achievement. If vesting goals are set too high, the awards may lose their motivational effect, working against their primary purpose of aligning employee efforts with company success.

4. Inconsistent record keeping: The executive team sometimes underestimates the amount of effort required to maintain legal documents, the cap table, vesting and exercising schedules. Good recordkeeping is crucial when the company goes through financial statement audits or financial due diligence. Without proper recordkeeping, financial statement audits and due diligence processes can be significantly prolonged. This can trigger higher audit and diligence fees, delays in closing the transaction, and even risking deal termination or substantial penalties (see the cautionary tale below).

5. Tax implications: The founders might overlook potential implications of income taxes and payroll taxes varying depending on the types of awards. Understanding the main differences between incentive stock options and non-qualified stock options is essential when creating equity incentive plans.

Accounting challenges regarding common forms of equity compensation

Startups frequently use equity compensation (e.g., stock options, restricted stock units, etc.), but many fail to grasp its accounting complexities. ASC 718 requires companies to recognize the FMV of these awards as an expense. Complexities arise with performance-based or market-based conditions, which require careful classification and tracking. Accountants must ensure that awards (liability or equity) are properly classified and they must monitor modifications that could lead to additional expenses.

Misclassifying these instruments above can result in misstated financial statements, which is especially problematic during audits or liquidity events (e.g., M&A, IPO). Failing to account properly for embedded derivatives or misclassifying equity and liabilities can lead to noncompliance with GAAP, potential penalties and loss of investor confidence. 

Cautionary tale

One of our startup clients initiated their first financial statement audit to prepare for a Series A capital raise. They expected to complete the audit within eight to ten weeks, which is typical for companies with adequate staffing and strong internal controls. However, the audit dragged on for over a year due to significant recordkeeping issues. The company lacked a cap table, despite issuing multiple classes of preferred equity, stock options, restricted stock units, restricted stock awards, convertible debt, SAFEs and warrants. Some equity awards had even been granted without board approval. Reconstructing the cap table required extensive time from the management team, causing substantial delays.

After completing the cap table, the company engaged a third-party consultant to determine the appropriate accounting treatment for these equity instruments under ASC 718, ASC 480 and ASC 815 — a process that took additional weeks. In the tighter capital environment of 2022 to 2024 marked by higher interest rates, the company ultimately failed to secure the necessary working capital to sustain operations. Furthermore, due to poor recordkeeping, the company was required to amend prior-year tax returns, resulting in hefty penalties.

This case underscores the importance of maintaining accurate records and clear internal controls to avoid costly delays and risks during audits and capital-raising efforts.

Equity compensation is one of the most important tools startups have for preserving cash flow and retaining top talent. As a CPA, you play a critical advisory role in ensuring the company accounts for these instruments correctly, reducing the risk of costly restatements and ensuring compliance during future liquidity events. The startup culture runs fast and furious with constant pivots and reiterations. Don’t let proper treatment of equity compensation get lost in all the excitement. That’s where you come in.

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Accounting

Trump berates Republicans to ‘Stop talking,’ pass tax cuts

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Donald Trump listens to a question while speaking to members of the media before boarding Marine One on the South Lawn of the White House in Washington, D.C.
Donald Trump

Al Drago/Bloomberg

President Donald Trump called on members of his party to unite behind his economic agenda in Congress, putting pressure on factions of lawmakers who are calling for last-minute changes to the legislation to drop their demands.

“We don’t need ‘GRANDSTANDERS’ in the Republican Party,” Trump said in a social media post on Friday. “STOP TALKING, AND GET IT DONE! It is time to fix the MESS that Biden and the Democrats gave us. Thank you for your attention to this matter!”

Trump sent the post from Air Force One after departing the Middle East as the House Budget Committee was meeting to approve the legislation, one of the final steps before the bill can move to the House floor for a vote.

House Speaker Mike Johnson has set a goal to pass the bill next week before the House recesses for its Memorial Day break.

However, the the bill failed the initial committee vote — typically a routine, procedural step — with members of the party still sparring over the scope of the cuts to Medicaid benefits and how much to raise the limit on the state and local tax deduction.

Narrow majorities in the House mean that a small group of Republicans can block the bill. Factions pushing for steeper Medicaid cuts and for an increase to the SALT write-off have both threatened to defeat the bill unless their demands are met.

“No one group gets to decide all this stuff in either direction,” Representative Chip Roy, an ultraconservative Texas Republican advocating for bigger spending cuts, said in a brief interview on Friday. “There are key issues that we think have this budget falling short.”

Trump’s social media muscle and calls to lawmakers have previously been crucial to advancing his priorities and come as competing constituencies have threatened to tank the measure.

But shortly after Trump’s Friday post, Roy and fellow hardliner Ralph Norman of South Carolina appeared unmoved — at least for the moment. Both men urged continued negotiations and significant changes to the bill that could in turn jeopardize support among moderates.

“I’m a hard no until we get this ironed out,” Norman said. “I think we can. We’ve made progress but it just takes time”

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Accounting

97% say CPA firms not using tech efficiently says survey

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While CPA firms far and wide have made major technology investments over the years, the vast majority of accountants say they’re not being used to their full potential. 

This finding comes from a recent survey undertaken by CPA.com and payment solutions provider Bill. The 400-person poll found that nearly all respondents, 97%, say they use technology inefficiently and that additional training is needed to maximize return on investment. Further illustrating the point, 43% of respondents said that technology is making them do more manual work, not less, something. Becky Munson, an Eisner Amper partner specializing in outsourced accounting services, believes this reflects a failure of training and change management, as she has seen many who disliked a technology change develop manual workarounds specifically to avoid using the new solutions. 

“We see employees make workarounds with tech stacks, which makes headaches that I think align with this 43%. We train people on new things, we ask them to use them, and they keep doing what they were doing before and only use the technology as much as they have to [in order to] move things along while you have people well trained on the software keeping up,” she said in a webcast on Thursday about the survey. 

Inefficient

Ariege Misherghi—senior vice president and general manager of accounts payable, accounts receivable and the accountant channel—said the issue isn’t just because of firms but also vendors that don’t provide enough support, and may not necessarily understand the profession in the first place. 

“Too often I think tools aren’t fully aligned with the workflows they’re meant to support. In SaaS they talk about product-market fit, but in this profession it’s not just that but also product-firm fit, and maybe product-profession fit. Not every tool marketed to accountants was built by people who truly understand how this profession works: the rhythms, the regulations, the stakes, the relationships, all of that. And even the greatest tools can fall short if they’re not implemented with a deep understanding of how firms really operate,” she said. 

And sometimes the inefficiencies come from both sides at once: the survey found that only 37% of firms require clients to use their tech stack, something that Munson said “breaks my heart” as “it is so low.” A streamlined, established tech stack is needed to achieve true economies of scale, but to get there firms need to standardize their data, and to do that firms need to make sure their clients’ data is also standardized, which usually means integrated tech stacks. 

“If you have all these different clients with all these different technologies, even if your own tech stack is standardized the systems they use is different, so the kind of data you will get will be different, and the work you need to do to make it work with your data is different, and your team spends a lot of time spinning their wheels,” she said. “Once you get standardized, where everything back and forth from clients is the same, you get to see how well the teams can do their work.” 

One source of inefficiencies is a rushed implementation. Munson said that, too many times, firms are so eager to get a solution working that they don’t pay attention to all its capacities, just the ones they need right now, but once the basics are down firms still don’t circle back on the rest of the features and how they can be used to drive efficiency. 

“Most of us have been through an implementation, either in the practice or with a client, where you’re just like ‘anything to get it working. Forget about all the fancy things it does. We just needed to do the basics right,’ and then we never circle back on those better, more efficient processes. We get to sort of minimal viable, and then we forget to come back and give it an extra polish. And so what we see there is the processes get written for that basic piece, and we never update,” she said. 

But this is part of what both speakers believed was the larger problem of firms getting lost in the details of their tech stacks and not taking a broader, more holistic approach, which would enable more efficiencies. The key component to managing technology effectively, Munson said, is looking not at individual solutions here and there but thinking of the system as a whole. 

“Often, what happens is something’s wrong or something is troublesome in some way. And so [we say] what can we do to fix that one thing? And we don’t think about it holistically and get all the right folks in there so that we’re solving for the right pain points,” she said. 

Misherghi agreed, and added that this holistic extends not only to the technology a firm already has but the solutions they plan to purchase in the future. When evaluating what technology they need, she said leaders need to think not in terms of specific point solutions to particular problems but things that can support the entire workflow—plus, the onboarding, training and ongoing support from the vendor. 

“Don’t just look for features, right? Look for solutions that support your workflows from providers that understand you. For firms, onboarding and training and optimization can’t be an afterthought. They’re essential to realizing value. I think this is where vendor partnerships matter. Firms seeking the strongest results aren’t just using software, they’re collaborating with their providers, they’re staying educated, they’re making sure their tools evolve alongside their needs. The best outcomes happen when your technology partner acts like part of your team, not just part of your toolkit,” she said. 

Misherghi said that the more successful firms she’s seen think less in terms of performing particular tasks but designing an entire system that, through automation, can do those tasks for them. It is less about plugging holes and more about developing a full infrastructure. The survey found that 74% of participants have a detailed plan to add new services in the next 12 month; Misherghi noted that, among these firms, 86% have a detailed technology roadmap, which is “a wonderful mark on the evolution of the profession we’re seeing.” 

She said a good tech roadmap is more like a service design blueprint versus a shopping list. Successful firms, she said, are not just chasing features but designing intentional workflows and systems capable of scalable service delivery. Similarly, she stressed that the provider should be more than just a vendor but a strategic co-architect that can help with growing pains. 

Misherghi said this approach will become especially relevant as AI becomes more common, as integrations will be key to their effective use, which means thinking in terms of the whole system to understand where those integrations should take place. Right now, she said, people think of AI in terms of analyzing data or extracting fields, but with the rise of AI agents will require firms to focus more on coordinating between them. 

“I think the next big leap is when those systems don’t just talk to each other, they act on each other’s behalf. I think the next big inflection point will be moving from automated steps to autonomous workflows, where AI agents aren’t just analyzing data or extracting fields but actually orchestrating tasks across tools based on firm policies and context and that will change the role of the accounting profession: its less time doing the work and more time designing the system for how everything works together. So the firms that will be thriving are those who are building strong infrastructure now because that is what AI needs to deliver on its core value,” she said.

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Trump tax bill fails in House panel

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A key House committee on Friday failed to advance House Republicans’ massive tax-and-spending bill after hard-line conservatives bucked President Donald Trump and blocked the bill over cost concerns.

The House Budget Committee rejected the bill 21-16, with Republican Reps. Chip Roy, Ralph Norman, Josh Brecheen, and Andrew Clyde joining Democrats to vote against it. The four hardliners demanded deeper cuts to Medicaid and other government programs.

It’s incredibly rare for bills to fail at this step in the process, with the committee vote typically serving as a rubber-stamp to the bill before it moves to the House floor. 

Representative Chip Roy
Rep. Chip Roy

Stefani Reynolds/Photographer: Stefani Reynolds/B

The setback could be temporary and the panel can still approve the bill once the GOP differences are resolved. 

Republican Lloyd Smucker, who switched his vote to “no” to allow the committee to bring it up again, told reporters the committee will hold another vote on Monday. 

Trump, whose social media muscle and calls to lawmakers have previously been crucial to advancing his priorities, inserted himself in the debate less than two hours before the vote, berating dissidents and urging them to fall into line. 

“We don’t need ‘GRANDSTANDERS’ in the Republican Party,” Trump said in a social media post on Friday. “STOP TALKING, AND GET IT DONE! It is time to fix the MESS that Biden and the Democrats gave us. Thank you for your attention to this matter!”

The bill’s failure exposes the power a small group of lawmakers can wield as Republicans seek to push Trump’s “one big, beautiful bill” through the House with very narrow margins. GOP infighting threatens to kill the bill, or at least significantly delay Republicans’ plans to pass the bill next week.

(Read more:‘One big beautiful bill’ full of tax surprises.”)

Republican holdouts spelled out their demands during Friday’s committee meeting, including accelerating new work requirements for able-bodied adults on Medicaid to take effect immediately rather the 2029 deadline set in the legislation. The ultraconservatives also want a faster phase-out of clean energy tax credits.

It wasn’t immediately clear how House Republicans will re-group to address the divisions and advance the bill.

“I’ll let you know this weekend if we’re going to return first thing Monday. That’s the goal at this point,” Budget Chairman Jodey Arrington said after the vote. 

House Majority Leader Steve Scalise, who is helping to broker a deal among Republicans, said party leaders are in touch with the Trump administration to address some of the changes demanded by hardliners.

“We are all in agreement on the reforms we want to make,” Scalise said. “We want to have work requirements. We want to phase out a lot of these green subsidies. How quickly can you get it done?”

House Speaker Mike Johnson on Thursday pledged he would work through the weekend to broker a compromise between moderates, who are seeking an increase in state and local tax deductions, and ultra-conservatives, who say they won’t support it without more spending cuts.

(Read more:Here are the winners and losers in the Republican tax bill.“)

Members from both factions — the SALT Republicans representing high-tax districts and the fiscal hawks who want steeper budget reductions — have threatened to block the bill if House leaders don’t acquiesce to their demands. 

“No one group gets to decide all this stuff in either direction,” Roy, an ultraconservative Texas Republican advocating for bigger spending cuts, said in a brief interview on Friday. “There are key issues that we think have this budget falling short.”

Both Roy and Norman urged continued negotiations and significant changes to the bill that could in turn jeopardize support among moderates.

“I’m a hard no until we get this ironed out,” Norman said. “I think we can. We’ve made progress but it just takes time.”

If the legislation passes the House, it would then head to the Senate where it would likely undergo significant changes. Several members, including Senator Josh Hawley of Missouri, have stated opposition to the Medicaid cuts in the House bill.

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